Concepts in this lesson
- Operating cash flow
- The cash a company's day-to-day business generates in a period.
- Capex
- Money spent on long-lasting assets such as factories, equipment, networks or data centers.
- Free Cash Flow
- The cash a business generated after paying its running costs and its investment in equipment, buildings and the like.
01Why profit and cash differ
The pizza shop made $37,500 in its first year. But some of its catering customers hadn't paid yet, it had ingredients sitting in the fridge, it hadn't paid all its own suppliers, and it had spent $60,000 on an oven that the income statement only charges $12,000 a year for. Each of those makes cash differ from profit, in one direction or the other.
The cash flow statement sorts all of it out, and ends with one number you can check against the bank: how much the cash balance changed over the year.
02Three sections
- Operating activities: cash from running the business, selling pizzas, paying staff and suppliers. The one that matters most.
- Investing activities: cash spent on, or received from, long-lasting assets: ovens, factories, whole companies. Spending on equipment is called capital expenditure, or capex.
- Financing activities: cash from and to lenders and owners: borrowing and repaying loans, issuing shares, paying dividends, buying back shares.
| Operating cash flow | +$41,500 |
| Investing: the oven and build-out | −$60,000 |
| Financing: owners $30,000, loan $50,000, loan repaid $10,000, dividends $10,000 | +$60,000 |
| Change in cash | +$41,500 |
The shop opened with no cash, so it ends the year with $41,500, exactly the cash on its balance sheet.
03From net income to operating cash
Most companies build the operating section by starting from net income and correcting it, item by item, for everything that wasn't cash:
- Add back depreciation (+$12,000): it was charged as a cost, but no cash left the register for it this year.
- Subtract the rise in receivables (−$10,000): sales counted as revenue, but the money hasn't arrived.
- Subtract the rise in inventory (−$6,000): cash spent on ingredients not yet used.
- Add the rise in payables (+$8,000): costs counted, but the shop hasn't paid the bills yet.
04Free cash flow
The figure investors care about most is free cash flow: operating cash flow minus capital spending. It is the cash the business produced that's free to pay down debt, pay dividends, buy back shares or save.
For the pizza shop: $41,500 − $60,000 = −$18,500. A profitable first year, and the business still burned cash, because it bought its oven. With no new oven next year and similar trading, free cash flow would be roughly net income plus depreciation, about $49,500. That is the normal shape of a young business: cash out first, cash in later. Enjoy it while it lasts, though: the depreciation line is the oven wearing out, and one day the shop buys another. Free cash flow that looks high because the big purchase is behind you, or low because it is just ahead, is borrowed from another year.
Now set the rise in receivables to $50,000, as if a big catering client stopped paying on time. Profit is unchanged; operating cash flow drops to $1,500. That gap is the classic warning sign.
05What to look for
- Operating cash flow against net income, over several years. A healthy business turns most of its profit into cash. Profit that keeps rising while operating cash flow doesn't is a red flag.
- Receivables growing faster than sales: the company may be booking sales it struggles to collect.
- How heavy the capex is. A software company may need little; a carmaker or a chip factory a lot. Free cash flow shows what's left either way.
- Cash can be flattered too, for a while. Pay suppliers late and operating cash flow rises this year and falls back later. That is why you read it over several years, not one.
- Where the cash goes. The financing section shows whether dividends and buybacks are paid from free cash flow or from new borrowing.
Profit is the scorer's sheet; cash is the chips in your hand. A player can be up on the night and still unable to post the next blind if the winnings are IOUs. Follow the chips.
06Read a real one: Apple
| Net income | $112.0B |
| Depreciation and amortization, share-based pay and other adjustments | +$24.5B |
| Working capital and other operating changes | −$25.0B |
| Cash from operating activities | $111.5B |
| Capital spending | −$12.7B |
| Free cash flow | $98.8B |
| Share buybacks | −$90.7B |
| Dividends | −$15.4B |
- Profit became cash. Operating cash flow ($111.5B) matched net income ($112.0B) almost dollar for dollar: a sign of high-quality earnings.
- Light capital needs. Capital spending was $12.7B, about 3% of sales, because outsourcing partners do most of Apple's manufacturing. That leaves $98.8B of free cash flow.
- It gave back more than its free cash flow. Buybacks and dividends came to $106.1B, 107% of free cash flow. The rest came from selling and maturing marketable securities, which is why the investing section was an inflow of $15.2B, where most companies show an outflow.
Source: Apple Inc., Form 10-K for the fiscal year ended September 27, 2025, filed October 31, 2025, Item 8 (Financial Statements and Supplementary Data). Dollar figures in billions, rounded from the reported millions. Find it on SEC EDGAR.